The Construction Industry Scheme
There are special tax rules which govern those operating in the construction industry known as the Construction Industry Scheme (CIS). The scheme sets out the rules for how payments to subcontractors for construction work must be handled by contractors in the construction industry.
What type of work falls within the scheme?
The scheme covers all construction work carried out in the UK. As a general guide, construction operations cover almost any work that is done to:
A permanent or temporary building or structure
A civil engineering work or installation.
Commonly the work might include:
Site preparation
Alterations
Dismantling
Construction
Repairs
Decorating
Demolition
For a full list of activities covered by the scheme see the definition contained within Section 74 of the Finance Act 2004.
Contractor/Subcontractor
The scheme centres round the concept of a contractor and a subcontractor therefore it is important to determine what these terms mean.
A contractor is any business or other concern that pays subcontractors for construction work.
Non construction businesses such as local authorities, governmental departments, etc will also be classed as a contractor under the scheme if their annual expenditure on construction operations equates to more than £1million over a period of three years.
A subcontractor is a business that carries out construction work for a contractor.
When operating as a subcontractor i.e. someone providing services to a contractor, that individual usually has the choice of operating as an employee, a sole trader or as a limited company.
Under the employee route, all of the individual’s income will be classed as earned income and as such, the contractor will deduct all relevant taxes due by the individual before any monies are paid to him.
Under the sole trader or limited company option the individual must first be able to show that they are genuinely self-employed, i.e. not an employee of the contractor. There are then specific rules which govern the amount of tax to be deducted by the contractor from the individual/company before monies are paid to them.
To determine how much is to be deducted from the individual, the contractor must contact HM Revenue & Customs (HMRC) who will then verify the individual’s status. HMRC will confirm the subcontractor’s payment status as being either:-
Gross – no tax deducted. Net – the contractor must deduct 20% from the gross amount. The verification number issued by the Revenue must be noted on all payments to the subcontractor as backup for the type of payment being made.
There are then additional requirements for the contractor to complete specific declarations to HMRC (monthly returns) and issue the subcontractor with a payslip (in a specific format as detailed in the legislation guidance). If the contractor does not adhere to these rules there are heavy penalties attached.
Further guidance on these rules and additional factsheets can be found on HMRC’s website at http://www.hmrc.gov.uk/new-cis
The main guidance on the new scheme is http://www.hmrc.gov.uk/new-cis/cis340.pdf booklet CIS340.